Rural banks could help poor, thwart corruption in India

Uttar Pradesh farm laborer Ram Singh had a plea for Duvvuri Subbarao when the central bank governor made one of his regular forays to India's rural heartland: Bring a bank to our village.

"Almost every year we're hit by floods and I struggle to save my home, my belongings," said Singh, 32, who lost the money he'd hidden in a grain bucket when his house was swept away in August by flash floods. "If we had a bank, I could at least protect the little savings I have."

Singh will get his wish. Following Subbarao's visit in January, the wheat and sugarcane growers of Lalpur Karauta, about 75 kilometers from state capital Lucknow, will get a branch of a state lender.

The Reserve Bank of India chief takes time out from running the nation's monetary policy twice a year to explain how the financial system works to some of the 720 million Indians who don't have a bank account.

"It's good for the poor people, for banks, for the governments and for the economy," Subbarao said in the village. It may also help reduce corruption and curb a widening wealth gap by bringing cheaper credit to some of the nation's lowest earners.

Rural banking in India could be worth $24 billion in assets by 2015 according to McKinsey & Co. In addition, the government would save about $18 billion by being able to pay subsidies such as education and health care direct to people's accounts, reducing corruption and inefficiencies. Of the 600,000 habitations in Asia's third-biggest economy, only about 36,000 have access to a local commercial bank branch, according to central bank estimates.

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Sixty percent of the 1.2 billion population remains outside the formal banking system. Only 10 percent has life insurance and 0.6 percent uses non-life insurance.

While visits from central bank staff can touch only a sliver of the more than 640,867 rural areas, they help the central bank understand the effects of policy on the majority of Indians, Subbarao says.

On Jan. 16, he arrived in Lalpur Karauta, which with 1,700 people is considered a village in India. A muddy track led past thatched huts to the mustard fields that provide farmers with an income in winter. Many rely on additional government handouts.

"Visiting rural communities is very important for us," said Subbarao during the visit. "Our offices are in big cities like Delhi, Mumbai, Chennai and Lucknow. We try to understand the condition of villages and how people live."

About two-thirds of the nation's population lives on less than $2 a day, according to World Bank data. Rahul Gandhi, son of former Prime Minister Rajiv Gandhi, estimated in 2009 that only about 10 percent of central government funds allocated for poverty reduction reached the rural poor.

Connecting the entire population with bank branches and using electronic payments to deliver funds could help eradicate losses of about 1 trillion rupees a year and reduce corruption that accounts for as much as 80 percent of the total waste, according to McKinsey.

The government is increasing the number of payments made directly, including money distributed through some welfare programs. Subbarao told the inhabitants of Lalpur Karauta that a bank account would also allow them to borrow more cheaply by avoiding loan sharks who charge as much as 60 percent interest.

"If you have a bank account, you can take a loan for your farm, business, house or to send your daughter to college, and save yourself from the clutches of the moneylender," Subbarao told villagers. "You can get your government money for subsidies, pensions, employment plans, directly into your accounts and won't have to pay any commission to agents."

Subbarao reduced borrowing costs this month to 7.5 percent from 7.75 percent to bolster India's economy, which is expanding at the weakest pace in a decade.

The government began transferring some benefits and subsidies for the poor directly to their bank accounts from Jan. 1, covering 51 of India's 629 districts. Education scholarships, pensions, health and family welfare projects and subsidies for food and fuels will all eventually be paid through the system.

"I've heard that the government provides a lot of money for the welfare of rural people but we hardly see any of it," said Singh, the farm laborer, wearing only a traditional dhoti around his waist. "With a bank here, I hope we can get that money directly."

Persuading commercial banks to expand their networks in rural areas is another matter. High costs and low saving levels make village branches less profitable. The cost of service delivery is as high as 10 to 12 times the revenue potential of the marginal customer, according to a report by Boston Consulting Group.

While total bank branches increased by 13,785 to 99,242 in the two years through March 2012, rural branches increased by only 4,038, according to the Reserve Bank estimates. The new Lalpur Karauta branch will be from state-owned Bank of India.

"The gestation period of a rural bank branch might be longer, but experience shows that in the medium term there is a good business proposition," Subbarao said. "They see this as not a very profitable opportunity."

To push for more village branches, the central bank issued rules on Feb. 22 that require banks to open one in four of their branches in communities with less than 10,000 people.

Only 35 percent of India's population has a bank account, compared with 64 percent in China, according to the Reserve Bank. The South Asian nation has 10.6 branches per 100,000 people, compared with 35.4 in the U.S. and 46.2 in Brazil, according to IMF's Financial Access Survey.

Lenders may be encouraged by rising farm incomes. Monthly per capita expenditure in rural areas, adjusted for inflation, rose by 18 percent in 2011-12 over 2009-2010, while urban consumption rose 13 percent, according to the government's annual economic survey. Village earnings increased as the government spent more on its rural jobs program and as improvements in areas such as irrigation boosted food-grain production to a record in the fiscal year through March 2012.

Protecting those earnings may help narrow India's wealth gap. In rural India, 5 percent of households owned 36 percent of assets, according to the government's 2011 Human Development Report.

Lack of financial literacy is also impeding the adoption of formal banking, said Rupa Rege Nitsure, an economist at state- run Bank of Baroda in Mumbai.

In Lalpur Karauta, Subbarao quizzed a group of schoolchildren.

"Do you know who I am?"

"Yes, you are the governor of RBI," a girl responds.

"Do you know what my job is?"

There is silence. Subbarao takes out a banknote and says, "I sign these."